[Federal Register Volume 75, Number 236 (Thursday, December 9, 2010)]
[Notices]
[Pages 76763-76766]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-30944]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63428; File No. SR-EDGX-2010-18]


Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
EDGX Rule 11.9 To Offer Anti-Internalization Qualifier (``AIQ'') 
Functionality to Exchange Users

December 3, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on November 30, 2010, EDGX Exchange, Inc. (the ``Exchange'' or the 
``EDGX'') filed with the Securities and Exchange

[[Page 76764]]

Commission (the ``Commission'') the proposed rule change as described 
in Items I and II below, which Items have been prepared by the 
Exchange. The Exchange has designated the proposed rule change as 
constituting a ``non-controversial'' rule change under paragraph (f)(6) 
of Rule 19b-4 under the Act.\3\ The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to offer Anti-Internalization Qualifier 
(``AIQ'') functionality to Exchange Users pursuant to proposed Rule 
11.9(f). The text of the proposed rule change is available on the 
Exchange's Web site at http://www.directedge.com, at the Exchange's 
principal office, at the Public Reference Room of the Commission, and 
the Commission's Web site.\4\
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    \4\ http://www.sec.gov.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The self-regulatory organization has prepared summaries, 
set forth in Sections A, B and C below, of the most significant aspects 
of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to offer Anti-Internalization Qualifier 
(``AIQ'') functionality to Exchange Users pursuant to proposed Rule 
11.9(f).
Background
    The proposed AIQ modifiers are designed to prevent two orders with 
the same Unique Identifier (as defined below) from executing against 
each other. The Exchange proposes to offer five AIQ modifiers that will 
be implemented and can be set at the market participant identifier 
(``MPID''), the Exchange Member identifier or the Anti-Internalization 
Group identifier level \5\ (any such identifier, a ``Unique 
Identifier'').\6\ With one exception, described below, the AIQ modifier 
on the incoming order controls the interaction between two orders 
marked with AIQ modifiers from the same Unique Identifier. The five AIQ 
modifiers are discussed more thoroughly below.
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    \5\ The Anti-Internalization Group identifier is a unique two 
character ID that an Exchange Member selects.
    \6\ Any Exchange Member that has an MPID issued by FINRA is 
identified in the Exchange's internal systems by that MPID.
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AIQ Cancel Newest (``CN'')
    An incoming order marked with the CN modifier will not execute 
against opposite side resting interest marked with any AIQ modifier 
originating from the same Unique Identifier. The incoming order marked 
with the CN modifier will be cancelled back to the originating User. 
The resting order marked with an AIQ modifier, which otherwise would 
have interacted with the incoming order from the same Unique 
Identifier, will remain on the EDGX book (``Book'').
AIQ Cancel Oldest (``CO'')
    An incoming order marked with the CO modifier will not execute 
against opposite side resting interest marked with any AIQ modifier 
originating from the same Unique Identifier. The resting order marked 
with the AIQ modifier, which otherwise would have interacted with the 
incoming order by the same Unique Identifier, will be cancelled back to 
the originating User. The incoming order marked with the CO modifier 
will remain on the Book.
AIQ Decrement and Cancel (``DC'')
    An incoming order marked with the DC modifier will not execute 
against opposite side resting interest marked with any AIQ modifier 
originating from the same Unique Identifier. If both orders are 
equivalent in size, both orders will be cancelled back to the 
originating User. If the orders are not equivalent in size, the smaller 
order will be cancelled back to the originating User and the larger 
order will be decremented by the size of the smaller order, with the 
balance remaining on the Book.
AIQ Cancel Both (``CB'')
    An incoming order marked with the CB modifier will not execute 
against opposite side resting interest marked with any AIQ modifier 
originating from the same Unique Identifier. The entire size of both 
orders will be cancelled back to the originating User.
AIQ Cancel Smallest (``CS'')
    An incoming order marked with the CS modifier will not execute 
against opposite side resting interest marked with any AIQ modifier 
originating from the same Unique Identifier. If both orders are 
equivalent in size, both orders will be cancelled back to the 
originating User. If the orders are not equivalent in size, the smaller 
of the two orders will be cancelled back to the originating User and 
the larger order will remain on the Book.
Additional Discussion
    AIQ modifiers are intended to prevent interaction between the same 
Unique Identifier. AIQ modifiers must be present on both the buy and 
the sell order in order to prevent a trade from occurring and to effect 
a cancel instruction. AIQ modifiers are available for orders entered in 
either an agency or principal capacity. An incoming AIQ order cannot 
cancel through resting orders that have price and/or time priority. 
When an order with an AIQ modifier is entered it will first interact 
with all available interest in accordance with the execution process 
described in Exchange Rules 11.8 and 11.9. If there is a remaining 
balance on the order after trading with all orders with higher 
priority, it may then interact with an opposite side AIQ order in 
accordance with the rules established above. Incoming AIQ orders that 
are priced through the price of a resting AIQ order may cancel the 
resting order as long as no other non-AIQ orders have priority.
    The Exchange believes that adding this functionality will allow 
Exchange Users to better manage order flow and prevent undesirable 
executions with themselves or the potential for (or the appearance of) 
``wash sales'' that may occur as a result of the velocity of trading in 
today's high speed marketplace. Many Exchange Users have multiple 
connections into the Exchange due to capacity and speed related 
demands. Orders routed by the same User via different connections may, 
in certain circumstances, trade against each other. The new AIQ 
modifiers provide Users the opportunity to prevent these potentially 
undesirable trades occurring under the same Unique Identifier on both 
the buy and sell side of the execution. The Exchange also believes that 
this functionality will allow firms to better internalize agency order 
flow which in turn may decrease the costs to its customers. The 
Exchange notes that the AIQ modifiers do not alleviate, or otherwise 
exempt, broker-dealers from their best execution obligations. As such, 
broker-dealers

[[Page 76765]]

using the AIQ modifiers will be obligated to internally cross agency 
orders at the same price, or a better price than they would have 
received had the orders been executed on the Exchange. Additionally, 
the AIQ modifiers will assist market participants in complying with 
certain rules and regulations of the Employee Retirement Income 
Security Act (``ERISA'') that preclude and/or limit managing broker-
dealers of such accounts from trading as principal with orders 
generated for those accounts. Finally, the Exchange notes that offering 
the AIQ modifiers will streamline certain regulatory functions by 
reducing false positive results that may occur on Exchange generated 
wash trading surveillance reports when orders are executed under the 
same Unique Identifier. For these reasons, the Exchange believes the 
AIQ modifiers offer users enhanced order processing functionality that 
may prevent potentially undesirable executions without negatively 
impacting broker-dealer best execution obligations.
2. Statutory Basis
    The rule change proposed in this submission is consistent with the 
requirements of the Securities Exchange Act of 1934 (the ``Act''), and 
the rules and regulations thereunder that are applicable to a national 
securities exchange, and, in particular, with the requirements of 
Section 6(b) \7\ of the Act. Specifically, the proposed change is 
consistent with Section 6(b)(5) \8\ of the Act, because it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments to, and perfect the mechanism of, 
a free and open market and a national market system. Specifically, the 
AIQ functionality allows firms to better manage order flow and prevent 
undesirable executions against themselves, and the proposed change 
described herein enhances the choices available to such firms in how 
they do so.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not significantly 
affect the protection of investors or the public interest, does not 
impose any significant burden on competition, and, by its terms, does 
not become operative for 30 days from the date on which it was filed, 
or such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \9\ and Rule 19b-
4(f)(6) thereunder.\10\
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the self-regulatory organization to submit to the 
Commission written notice of its intent to file the proposed rule 
change, along with a brief description and text of the proposed rule 
change, at least five business days prior to the date of filing of 
the proposed rule change, or such shorter time as designated by the 
Commission. The Exchange has satisfied this requirement.
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    The Exchange has requested that the Commission waive the 30-day 
pre-operative delay so that the Exchange may immediately offer Exchange 
users the ability to better manage order flow and prevent undesirable 
executions with themselves or the potential for or the appearance of 
wash sales that may occur as a result of the velocity of trading in 
today's high speed marketplace. The Commission notes that the proposal 
is based on similar rules of other exchanges \11\ and believes that 
waiver of the operative delay is consistent with the protection of 
investors and the public interest. Therefore, the Commission designates 
the proposal operative upon filing.\12\
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    \11\ See Securities Exchange Act Release No. 60182 (June 26, 
2009), 74 FR 32014 (July 6, 2009) (SR-NASDAQ-2009-057); Securities 
Exchange Act Release No. 60191 (June 30, 2009) (SR-NYSEArca-2009-
058); Securities Exchange Act Release No. 60266 (July 9, 2009), 74 
FR 34380 (July 15, 2009) (SR-BATS-2009-022); Securities Exchange Act 
Release No. 62102 (May 13, 2010), 75 FR 28670 (May 21, 2010) (SR-
BATS-2010-011).
    \12\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml or
     Send an e-mail to [email protected]. Please include 
File Number SR-EDGX-2010-18 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-EDGX-2010-18. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-EDGX-2010-18 and should be 
submitted on or before December 30, 2010.


[[Page 76766]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-30944 Filed 12-8-10; 8:45 am]
BILLING CODE 8011-01-P